Are You Insuring the Irreplaceable?

A few weeks ago, I decided to spend a few hours looking carefully at all of our insurance policies. I knew in general how most of them worked, but in many cases I was a little fuzzy (or more than a little fuzzy) on the specifics.

As I studied our homeowner’s insurance policy, I was surprised at how high the value of the insurance was for replacing home contents. It was one of those little things that threw up a red flag for me, and it kind of stuck in the back of my mind.

About a week later, I was still thinking about that number, so I took a very careful inventory of our home’s contents, adding up how much these items would cost to replace – and sure enough, the cash value of everything in the home was only about 40% of the amount we were insuring. Reducing that number would surely save us a significant amount on our policy, so I was about to call up and start discussing things with our insurers when my wife popped in.

She was curious as to how much value I was putting down for some of our most valuable personal items, like some of the handmade wooden artwork her grandmother made, a painting done by my great grandmother, and some mementos from our wedding.

I went through the list I’d made and rattled off a few prices, which were estimations of what they’d cost to replace with similar items. My wife shook her head and told me, flat out, that I was drastically shortchanging the items.

But was I? This has been a big question for discussion around here for a while, actually.

My wife’s position initially was that such items have a very, very high value. She propositioned it this way: how much would I accept in payment for that painting by my great grandmother? The price would have to be very high – and I don’t think I’d sell it at any price.

That’s the conclusion that many people come to when they consider insuring the property in their home. They look at those irreplaceable and personally valuable items and think about how much they’d feel was an appropriate price to let go of something so valuable. Quite often, that price is insanely inflated – but for good reason. The item has a great deal of personal value.

But consider this: would you be able to replace that item if it were destroyed? Would you even think about replacing it?

My grandmother’s painting is invaluable to me. I can’t even realistically name a price that I would sell it for. But if it were destroyed in a disaster, I wouldn’t even think of replacing it. I’d have my memories of it, and I’d probably lament that it was missing, but how could I possibly replace it?

In our new home, I would probably put up a print on the wall, or possibly an original painting by another artist, but neither one would come close to the value that I personally ascribe to my grandmother’s painting.

This gets back to the original question: how much should my grandmother’s painting be insured for? Considering that it’s not something I would ever be able to replace – nor would I really attempt to – I’d argue that it shouldn’t be insured for much at all.

Then, if you apply that rule of thumb to items in your house that really only have a deep personal value, you’ll often find that the cash value of the contents of your house is not nearly as high as you might think it is. In that case, you’re likely vastly over-insuring the contents of your home – and paying an extra premium for that privilege.

Now, that’s not to say that there isn’t a good argument for insuring on the high side of what you own. You’re far better off having a little bit of breathing room than cutting your insurance down to the bone.

But when you consider the value of the property in your home, think carefully. Ask yourself whether you’re insuring the value that you personally ascribe to things – or the real value of replacing things that you would actually replace. You might just find that you’re over-insuring your contents just because of your own personal feelings – and that’s a financial leak you can easily plug.

I would think an heirloom item would be irreplaceable. Even if you could find another like it it’s still not the one your grandmother painted or gave to you. I have a candy dish my grandmother received on her wedding day and she gave to me on mine. I feel pretty sure I could replace it – somewhere there’s got to be another. But the I would not replace it – cause the one I’m replacing it with would not be the one she gave me. So I wouldn’t even bother to insure it. I would only insure the contents of my house that are replaceable – couch, chair, china, tv, car (in the garage), things like that. Some of my personal items are simply irreplaceable and have no insurable value due to that fact.

The only exception would be a truly valuable heirloom. Something that regardless of sentimental value is valuable and might get stolen. A fur coat, valuable painting, expensive silver, or something a thief may truly value – that would be something worth placing insurance on.

Another problem with over-insuring items is that the insurance company is looking at what that item would be worth were you to sell it, not what it’s worth to you, or even what it’d cost to replace it. So, let’s say you wouldn’t sell that painting for less than $10k, but were you to actually sell it, you would only get $100. Guess which the insurance company would pay?

We recently were involved in a car accident, and I went round and round with the adjuster about the car hitch we had installed. The replacement cost was $270 plus $60 for labor, plus tax. They wouldn’t give more than $150, which they said was stretching it. Reason being, they refused to buy me a new hitch to replace a 2 year old hitch. I told them I’d accept a 2 year old hitch if they could find one (I tried craigslist and ebay, none available at all), but I wanted a replacement. Instead they gave me what they thought I could have sold it for. Very frustrating.

You should have called your agent before you wrote this. The contents figure on most homeowner’s policies is a certain percentage of the home amount (usually 70%) and you don’t save any money by reducing it.

Most HO insurance “contents” limits are calculated as a percentage of “structure” limits.

House is insured for $300,000, contents is usually 75% of that number. I am not sure you can even reduce the contents coverage by itself.

Regardless, the number one limit that is generally overinsured is the structure. Most people insure their home for either the purchase price, the appraised value, or the assessed value.

All are wrong. Insurers overinsure home all the time. It is a guarantee or profit. By insuring the land and having excess coverage, you are apting for insurance you will never collect on, even with a total loss.

The home should be insured for the replacement cost. The appraised value includes the land it sits on, which to my knowledge has never been lost in a claim.

Most policys also have replacement cost of 120%, which goes over and above the limits stated on the dec sheet.

The point. If you have a $300,000 appraised value home, likely $50,000 is land. the remaining $250,000 should be insured, and that amount can legally be insured with a policy amount of $210,000 (with 120% replacement)

The difference between $300K and 210K of insurance – 30%. That is hundreds of dollars a year you are now not paying to insure something you will never claim.

This is actually a well-known problem to psychologists. People evaluate things based on personal value, rather than objective value, which makes them behave in all sorts of “irrational” ways. Just take the endowment effect (http://en.wikipedia.org/wiki/Endowment_effect) as an example: simply having something increases its worth to you.

As noted by others, the fix is easy: when you’re inventorying your worth, start with the things you would replace and work backwards. As for George’s comment about how much you save, you’d be surprised…small amounts of money over many years add up.

Just out of curiosity – how does your theory apply to, say, art museums? I mean there’s no way to replace a Vermeer (only 36 in the world so the museum wouldn’t even be able to buy a comparable work by the same artist) – so should the museum still both insuring it?

I worked as a homeowner’s claims adjuster for over a year (and oddly, am trying to get back into it after relocating!) I ran into this problem often, sometimes to the point that people’s inventories and the cost per item were laughable (did you really buy a $10 can of Morton’s Salt!??!!).
There are two main types of policies: replacement cost, where you receive the entire amount, and actual cash value. Most policies are actual cash value (ACV). When you file a personal property claim, the adjuster reviews your inventory, the cost to replace the item and then calculates the depreciation. You receive the cost of the item, minus depreciation- example: costs $40 to replace, it is 3 years old and depreciates at 10%. So, you will only receive $28 for the item. However, once you replace the item, the insurance will reimburse you the remaining $12. Very few claims that were submitted to me ever bothered to submit the documentation stating they replaced the item, meaning that many missed out on the full payment. Trent is offering a good tip in this article; this is a very good idea to have a figure in mind. It is also ideal to create and inventory and video recording of important items, serial numbers, etc. as well- Trent has also written about this.
To address other comments: the agent uses the appraisal of your house to apply a % for personal property. You can adjust this at anytime. Art, jewelry, guns, furs, silverware, china, etc. are covered however there are limitations on your policy. If you have a full set of grandmother’s antique china that is worth several hundreds of dollars, or more commonly, an expensive jewelry collection, you need to purchase additional coverage to ensure that if these items are damaged or stolen you are able to replace them (as a result, the art museum’s coverage would be very different!)

Anyone who buys anything but replacement value insurance coverage is basically throwing away their insurance premiums. Actual cash value policies will always lead to your losing money on the deal, and a great deal of aggravation. We furnished our home with cast-offs, family donations and thrift store purchases, and with nothing “paid for” the insurance company would reimburse us — nothing. Bet you can’t afford to replace everything for — nothing!

You should insure original art to a value that will let you replace it with a work of comparable size and character, even if the sentimental value is not comparable. Original artwork is not cheap if it is well done, and it should be valued appropriately.

If you have unique examples of fine china, silverware, glassware, or pottery, again they should be insured so that you can replace with a comparable quality replacement. My partner’s mother inherited a beautiful set of one of a kind ivory and gold bone china. Nothing commercially available is as unique. But you can get ivory and gold bone china that is lovely, ornate and has detailing that is similar to the custom china. The similar commercial china in a similarly extensive set of place settings and serving pieces is probably close to $10,000 in value, and it doesn’t depreciate much (if anything) on the used market. It is well worth the money to make sure that the heirloom china is insured to at *least* replacement value.

Naturally, the much cheaper every day dishes shouldn’t be insured for all that much. They’re a quite conventional, mass market design. Every fine china seller has something similar, and replacing it wouldn’t cost as much as most cars. Well maybe as much as a very well used car *g*.

It is also worth asking pointed and nasty questions about how the policy determines replacement value on items that do not wear out easily. Fine china doesn’t wear out readily. Usually, it breaks long before the glaze wears through. Same with silverware, artwork and other sorts of household goods.

Here is a great idea for taking a quick inventory of what you have in your house: Use your video camera and walk through each room, open the drawers and closets and note out loud any significant items. Store the tape in your safe and you can use it should you need it. My in-laws had a house fire in 1994. It can happen to anyone and a few minutes to ensure that you actually receive value for the insurance you have been paying all these years is a wise investment.

Most of the possessions my wife and I are priceless to us, but they’ll likely be worthless to a claims adjuster.

For example, an insurance company might pay me a few hundred dollars for my sister’s paintings, but I wouldn’t sell them for any amount of money. And if a fire destroyed our home, I’d have paid years of premiums for little economic benefit. Sure, I might get a check for the depreciated value of the paintings, but I will never get the paintings back.

As a result, we don’t insure any of our possessions at all.

A second thought: I’ve always thought it was kind of foolish to own objectively valuable things like jewelry, expensive electronics, or extremely expensive furniture. You risk making yourself a target, and you end up paying extra in insurance premiums. Isn’t it ironic to have to pay extra to “protect yourself” from losing things that you don’t really need?

I’m a claims professional. Here’s another thing to keep in mind when insuring: some policies, like the NFIP flood policy, either only insure antiques for their functional value (ie- a heavy wood table can be replaced by any heavy wood table) or have a dollar value limit on antiques and/or artwork (usually $2500). This limit often applies to jewelry and firearms as well. So in addition to checking your dollar amounts of insurance, I’d request a copy of your actual policy and make sure the things most important to you are insured by that policy. If not your agent can usually add riders to cover things like jewelry over the limit.

One last thing to keep in mid- most personal property insurance is for actual cash value, which means the insurance company will deduct depreciation based on the item’s age and condition. You can usually get a replacement cost endorsement, but this will increase the premiums.

My home burned down in 1993. We lost everything. And you don’t realise how much EVERYTHING is until you have to sift through it and list it.
& those highly sentimental objects do have value – our great, great grandmother’s black walnut dining room table & chairs was worth a decent used car. The guitar my mother pulled out of a dumpster in Europe, family paintings, kitchen items, hand tools, etc all had value… and while yes we miss those things due to the attachment we had to them via our ancestors it was more exspensive to rebuild our life then we’d ever imagined.
We were under insured by 15k and we had replacement coverage.

Trent have you thought about getting a professional type photo of your great grandmother’s painting? That way if it gets damaged, lost or stolen, you would be able to get a life size print made. You could also ask other family members if they would like a print.

I have been doing this with all my family photos, it is a great way of sharing that one picture of grandma with everyone. I’ve been surprised at how many pictures of relatives that I’ve never seen appear once I offer to scan them and burn them to CDs. They also make great Christmas gifts and are fantastic at family reunions.

Troy is correct. I also went through my house about a year ago and realized that it was absurd to insure the contents for $90,000 since my wife and I still have very basic Target furniture and very few luxury items.

When I asked our insurance agent about it, however, he said that 75% of structural value for contents is the only kind of policy they write–other than charging more for policy add-ons for people who have very, very valuable things. Thus, we are absurdly insured for $90,000 in contents on a $120,000 starter home.

He told me that even if they were able to write a policy that would take contents down to, say, $30,000 it wouldn’t affect the price of the policy much at all.

I can confirm that most standard homeowners policies consist of Cov A-the dwelling itself with cov B other structures, C contents, and D loss of use are based on percentages of coverage A. Little to no change in premium occurs by decreasing the other coverages. Also in regards to whether you are overinsuring the dwelling, most insurance companies utilize highly sophisticated software to determine the Reconstruction Cost of your home. This software is fine tuned to include all costs of reconstruction, even debris removal. Most insurers do not include the value of the land. I
think the key is to have a good relationship with your local agent/carrier. Also, especially in these economic times it is very frustrating to be insuring your home for more than the market value, but you are not insuring your home to sell it, you ensure it, so that in the event of a total loss your home can be rebuilt in the same spot. If at all possible it is easier to manage your premium by choosing a higher deductible and having a good security system.

Eden – You could not apply this theory to a Vermeer painting. There is a market for Vermeer paintings, establishing the value for same. The market for Trent’s great grandmother’s painting is probably limited to a few family members with considerably less resources than those who might bid on a Vermeer.

The only thing that i have insurance on is the house and car(required by law), everything else I self insure, I have an account that every time someone offers me insurance for something at a store, i transfer that money into that account and thats how i am able to self insure and still earn a little interest.

If all you have is the minimum insurance on your car, especially liability, all you “self-insurance” money could end up in the pocket of your victim someday, including your house, your retirement account, kid’s college funds etc. Saving money on premiums can be an extremely expensive decision.

@”If all you have is the minimum insurance on your car, especially liability, all you “self-insurance” money could end up in the pocket of your victim someday, including your house, your retirement account, kid’s college funds etc.”

This is absolutely true, if you own a home your liability and property damage coverage on your car insurance should be high enough to cover any reasable damage to protect your own assets against a damages judgement.

Also, if you live in a state that allows a “declaration of homestead”, you should have that done for your house. I live in Massachusetts, which allows such a declaration, and many other states do as well. What it does is prevents your primary residence from being attached in any legal judgement. It costs very little to have done and is excellent protection against having your house taken from you as a result of any kind of lawsuit.

Not to be too contrarian, but in some cases of chemical contamination, the land, too, can be lost. And if you have rental properties, make sure they are insured against chemical contamination. One meth lab and you can lose your entire net worth.

“The home should be insured for the replacement cost. The appraised value includes the land it sits on, which to my knowledge has never been lost in a claim.”

What happens for something like a hurricane where the flood destroys the land and leaves a large lake where the land once was? Or forest fire cases, or more odd ball thing such as meteor strikes destroying a house and its ground? How are those all handled? It seems like without global warming we will have a lot of land go under under which will be interesting for the insurance companies. What would happen if California fell into the sea?

If California falls into the sea, almost every homeowner there will be out the money. Land movement is specifically excluded from a standard homeowners policy unless you buy earthquake insurance. Landslides, mudslides, sinkholes – too bad. That is ‘land movement’ and is not considered included. There are very few ways to insure damage or contamination to land itself. Those policies are extremely expensive, mostly to prevent claims, which are even more expensive. In general, applicants are screened to make sure there is no risk of a contamination claim before a policy is written. This is why you are asked to disclose old wells, underground fuel tanks, and nearby dairies – because of the risk of groundwater contamination. With regard to insuring only the cost to rebuild the house, it’s true that this is the number you want – but consider that it is almost always more expensive per house to rebuild one house than it is to put in a subdivision. You lose all the economies of scale. You can’t spread out the costs. The cost to replace a house is usually more expensive than you’d think and often higher than market price, which has no relation to cost of materials. Regarding ‘irreplaceable’ items, the usual process is to schedule these on a rider or floater at a ‘stated price’, which is what the premium will be based on. The higher the price you state, the higher the price of the insurance. However, that is *not* the guaranteed amount you’d get if the item were damaged or stolen. You’d get the lowest of four figures (and now I’m operating off memory, so-) cost to repair, actual cash value, difference in value (after damage) or stated value. On the other hand, objects falling from the air are a covered cause of loss– probably because it’s rare!

I agree that you can’t put a replacement value on family treasures. I have paintings and drawings that mean as much to me. I have taken photographs of them to share with family and for safekeeping. I even have a photo of one of them framed in my office. Handmade or handed down gifts cannot be replaced so a photo would be the next best thing for me.

There are two types of contents insurance: value of the item at the time, and what it would cost to replace it with a new item of the same caliber. We have the “replace it with a new item of the same caliber” type. So, God forbid, we lose the contents of our home. We have a 10 year old tv. IF we tried to sell it we might get $50. We certainly cannot buy a new one for $50! Or a 6 year old mattress- definitely not going to get back what you paid if you try to sell it. Likewise our furniture- some of it, my husband and I finished ourselves. Can we get back the cost of our labor and the value of our time? No.

For heirlooms, unless it is something like a stamp collection or baseball cards that you could actually go and repurchase the exact same things, I don’t think it’s worth insuring their value. We do not have antiques or many valuable items (we’re rather frugal and our families were rather poor), but we do have a lot of photos that are meaningful to us. No one could give me enough $$$ to replace those, but there’s no real way to insure them either.

Hi Trent, I discussed this post with my fiance, and he had an interesting point to make. What if there were a fire in your kitchen that created severe smoke damage throughout the rest of the house without destroying the contents? Would you then be able to use insurance money to send your great-grandmother’s painting to a museum-class art restorer?

I agree with you that the content amounts do seem pretty high and arbitrary. I doubt you will be able to reduce the coverage amount since they are usually based on the amount you have the building insured for. You can usually add specific high priced items that are appraised and cover them separately, but I’ve never seen a homeowners policy that lets you name your content coverage amount.

Insuring you vehicle for the state minimum is stupid. That is as blunt as it gets. If you would like to self insure go for it, but self insure on a fixed cost item such as property (such as your house or your car if you really want to take that risk) but buy all the liability insurance you can afford.

This is a nice reminder. I’m pretty sure my renters insurance is for replacement value not ACV. I estimated high on most things, especially clothes and shoes because I figured the things that would result in a claim (fire, flood) would leave me with little time to bargain shop before I ended up having to go to work naked. I lowballed all my furniture though because, while it’s all nice handmedowns, it’s all handmedowns that I would never replace with comparably nice items. I just don’t say no to free stuff.

If the insurance company is giving you 120% replacement value (Troy Comment#4) then you should not include that into how much insurance to take as a replacement amount. This 120% should be used in the event the replacement of your home starts to differ from building material costs. It’s a buffer zone. Also, their are companies out there that offer guaranteed replacement coverage with no cap unlike the 120% a lot of insurance companies give. These are the kind of policies everyone should have. Ask an independent agent, they can help.
Also, buy as much liability insurance on your car as you can afford, because it will save you a heck of a lot of money on the long term in the event you hit somebody and they are severely injured.
As an agent I deal with this everyday and believe me, I see instances of people being ‘cheap’ and buying the lowest limits the state allows only to run a stop sign and disable somebody!

Years ago I was helping a man whose uncle had died in a house fire that damaged or destroyed the house and contents. (Much of the damage was from smoke and water, not the flames.)

The man had replacement cost coverage. The list of contents the claims adjuster produced was surprising.

First of all, EVERYTHING was inventoried, down to the used toothbrushes, the light fixtures and BULBS, the window coverings, the old clothing. Second, the “replacement cost” estimates seemed to me consistently on the high side. On what was a very modest home filled with old modest furnishings, the total value of the contents ended up well over $100,000 and this was nearly 20 years ago.

By the way, this highlights one of the ways to protect valuable photos and items of sentimental value – protect against smoke and water, even if you can’t protect against flames, and there’s a chance some stuff will survive.

Unless you have a separate rider, you are not going to be able to assess a higher value on a lost item just because it’s personally valuable to you.

Also, as someone noted, there is often a set value for insurance on the contents of a home (with a homeowners policy). I asked about this when I moved and got a new policy. I was at the minimum and the contents coverage was something that still seemed very high, like $200,000.

FYI, there is home inventory software out there. One is KnowYourStuff.org, which is free to use but charges a fee to securely store the database of your stuff for you.

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